Hedge Funds Have Become a Popular Investment Strategy: Why?

Among the sea of financial instruments, hedge funds are incessantly gaining a huge popularity among investors. Do you want to know why? Hedge funds are a kind of investment strategy that enables the investors to earn reliable returns over time by diversifying investment portfolios and managing risks. Definitely, that’s not all this fund offers nor is the only reason for becoming a popular choice among investors. If you want to know more reasons why investors are increasingly adding hedge funds to their portfolios than otherwise traditional investment, then read the article further.

Aggressive investment strategy: One of the most primary reasons for the popularity of hedge fund than traditional investment is the use of aggressive hedge fund investment strategies for generating higher returns. In any case, a hedge fund that offers a higher return increases the level of portfolio stability while the traditional investment under-performs, or at most highly unpredictable. However, there are many hedge fund strategies that have fixed-income-like volatility but the difference is that during the times of low-interest rates, the latter offers stable returns, but typically too low to meet the inflation. Hedge funds, on the other hand, generate bond-like returns by using much-improved investment strategies and outpace inflation on a consistent basis.

Return enhancement: Another reason for the popularity is the ability of the funds to enhance overall returns of a portfolio, in just two ways. The first way is to maintain a low-risk portfolio but to squeeze out additional returns through a low volatility hedge fund. The second way, on the other hand, is to add a hedge to the portfolio that has a high-return strategy to boost overall returns. These funds usually take positional direction based on the forecast of stocks’, bonds’, currencies and commodities’ future prices.

Diversification: Haven’t you heard the saying ‘Do not put all your eggs in one basket’? Similarly, hedge fund investment companies do not invest in one particular financial instrument but diversify them to earn a risk-adjusted return. Hedge fund managers greatly diversify their portfolios and do not limit their investments only to stocks or IPOs. Rather they spread across various asset classes. Many investors even look at the diversification as not having all of their money in one company. But investing in 10 different companies but all in one asset class does not help either to earn the right amount of profit. You need to invest in 10 different companies and in 10 different asset classes for generating a risk-free return.

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